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Monday morning, the column (subscription required) stated quite confidently that Expedia's plan to buy back 42% of the company's shares was a waste of shareholder cash on an overvalued asset (Expedia shares being the overvalued asset). The evidence? Expedia is trading at 26x per share earnings, and the debt level would equal ~4.5x debt/EBITDA.
Well, the problem with Breakingviews is that they take about ten minutes to research a company and not two weeks. I happen to have done a lot of research into Expedia, and while I did not own it in the Vestopia portfolio I manage, my hedge fund owned loads of it - we bought it at ~$18 late last year. Here's why Diller's buyback creates value:
Expedia had about $600M in adjusted operating earning in the last 12 months. By "adjusted" I mean that I take out a lot of the accounting charges that the company is required to take for the amortization of intangibles. Anyway, let's assume that the company spends the $3.2B in debt to buy back shares at the top of the tender offer range - $30/share. That would retire ~107M shares, leaving Expedia with ~244M shares left (adjusted for outstanding options). Assuming an 8% cost of debt (which is mind-blowingly conservative - Expedia will likely pay 100bp below that), that means that from the $600M in operating earnings, ~$250M will go to interest payments. That leaves about $1.50 in operating earnings per share of Expedia stock. Tax that at 30%, and you get about $1/share in free cash flow.
Now, one might argue that a 3.33% FCF yield is low (with the stock at ~30/share presently). I would argue that for a company with presently trough margins, incredibly low capital intensity, and high-single digit revenue growth for as far out as the eye could see, a 3.3% FCF yield is pretty good. Even a bit cheap. As for full disclosure, my hedge fund unloaded Expedia yesterday after the run-up.
My fair value estimate for the stock before the buy-back announcement was ~$28/share. After the buyback announcement, I calculate a fair value of $35/share. Not a bad increase in value. Diller was simply selling a rich asset (debt) and buying back a relatively cheap asset (his stock). That's good capital allocation, and it's unsurprising from someone who own 50% of the company.
EXPE 1-yr chart:

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